I need to begin with a personal reaction.The reason I was determined to go to the 6th
edition of this text was this chapter.The updated cases are important too, but this is the chapter that brings
the most original thinking to the book.It begins with a pretty fundamental question -

What business are you in?

The chapter then explains that there are more businesses for
you to be in than you may have thought.Those of you who have read Peter Drucker may
recognize some of the basic framework for the discussion, but the authors do
the most clear and comprehensive job of listing possible businesses that I have
seen anywhere.

In the table below I have taken the liberty of adding a few
additional business models and briefly describing the business models they
name.

Evolving Business Models

Direct sellers

Profits enhanced through disintermediation

Retailers –
brick and click -tangible

Control inventory, set prices, sell physical products
online.

Retailers – brick
and click - digital

Retailers –
digital only

On-line gambling and sales of pornographic materials.Evolving to include gaming services among
multiple players (fantasy sports, etc). Initial efforts at ebooks, music, film, have not yet been successful

Focused Distributors

Focused on one industry or niche market.

Retailer

Control inventory, set prices, sell physical products
online.

Marketplace

Sell products and services, but do not control physical
inventory.Revenue is based on
commission or sales fees.

Aggregator

Present information about products, but do not sell
directly.Collect service fees for
referrals.

eBay.Price is negotiated by buyer and
seller.Exchange never holds
inventory.Revenue comes from
transaction fees and possible ads.

Portals

Horizontal Portal

AOL.Gateway to all
the web

Vertical Portal

Web MD.Tied to a
single industry.Try to organize
related materials with more depth, some screening, some ease of navigation.

Affinity Portal

Targeted to a market segment – age, ethnic
characteristics, gender or geographic region. MySpace is a
current leader.

Producers

Manufacturers

Internet integrates the supply chain

Service Providers

Online service delivery

Educators

Digital course presentation

Advisors

Newsletters and regular emails to reinforce customer
contacts

Information and news services

Additional on-line distribution channels

It may take some re-readings to fully understand some of the
more arcane definitions of these business models, but it is the central point
that is most important – the ubiquity of the Internet has created a significant
number of new business models.Business
approaches that were barely tenable a decade ago now represent significant
opportunities.

This would be a good point for each of you to stop and ask
what business you are in and what business you could be in.As you think through the possibilities, let
me describe a business you may already know – American Airlines.

The SABRE Story

In the early 1980s American Airlines created one on-line
reservation system (SABRE) and United Airlines created another (APOLLO).By 1990 SABRE was bringing in $500 million
each year in revenues with a 30% pretax profit margin.The two systems fought for dominance as each
tried to be the system of choice used by travel agents.

Competing airlines were concerned about the advantage these
systems gave American and United because while American and United would list
the other airlines’ flights on the system, if you asked for flights from X to
Y, somehow American flights always showed up first on SABRE and United flights
showed up first on APOLLO.Competitors
also complained that their flight schedules and fares where often out of date,
while American and United said they were keeping up as best they could, it
takes time to update computers, so sorry, etc.

What never came up in court cases and congressional hearings
is the issue that seems far more important to me – business intelligence.Since these two airlines were doing bookings
for the others, they knew which flights flew full and which were losers, which
airfares worked and when fares crossed the wrong threshold.So American and United were always in the
best position to know how to grow their own companies.

A recent analog is Dell Computer.They have sold HP and EPSON printers for
years.As they sell these printers they
know which models and features are popular, and which price points matter.Six months ago they announced that they would
now start selling their own brand of printers.Presumably they have had their product design and marking research done
through the sales data they have amassed over the years.

My point is this -- new business models not only provide the
potential for new businesses (SABRE is now an independent company), but they
can significantly inform the decisions of the original business.

Now back to my question – what business are you in?What business could you be in?How could that new business improve the
performance of your current business?

American Express and Amazon.com

I haven’t been a fan of American Express because of some
poor dealings I have had with them over the years, but you have to give them
credit for one decision described in the chapter – they decided to add online
travel services to their face-to-face travel services.This increases their initial costs for
service, can be blamed for “cannibalizing” their existing travel service, and
of course causes some internal turmoil when the two sides of their travel
business compete.But they are
leveraging existing knowledge to expand into a new delivery method, and having
learned the new rules of online services, then expand
naturally into those other businesses.This is classic “economies of scope.”It was the first move online that must have been tough for management,
but the rest follows fairly naturally from that.

The Amazon story starts online and then expands as
opportunities appear.Two points I would
add.First, Amazon is in Seattle
for a reason.This is one of the most
striking examples of a modern business going where the natural resources
are.In this case the natural resources
are talented software and network engineers.Without that easy access to talent, much of the rest of the story
couldn’t take place, or wouldn’t have taken place so quickly.Management deserves great praise for HR
planning.Second, we have all read
Amazon’s obituary a dozen times in the business press.It was supposed to die with the rest of the
dotcoms.The fact that it didn’t says a
great deal about its ability to adjust to business opportunities (and cut their loses where needed), and the tenacity of their
management.It must have been hard
driving home on a rainy evening when everyone is saying you are the next bomb
to hit e-commerce.Somehow they managed
to get out of bed the next morning and keep the business going.

Back to Drucker

Page 75 in the book gives a series of steps for businesses
to use in analyzing business models.I
have no objection to any of the steps, but I do enjoy Drucker’s
simpler model –

Know
what is happening in the world and what opportunities exist.

Create
a theory of business for how you will take advantage of those
opportunities.

Know
what your core competencies are so you know what you can do and what you
can’t.

In terms of Chapter two, I would translate Drucker this way:Be
aware that business has evolved to create many more business models than
existed ten years ago.Create a business
theory that uses these new models in your industry.Examine your own abilities to determine what
you and your company can successfully achieve.

Questions for the week

Using
the definitions of Chapter 2, what business are you in?What business could you move to?What positive and negative impacts could
that new business have on your current business?

Most
of this chapter could be described as using economies of scope to leverage
a presence in a new field or bring a new product into an existing
field.Do economies of scale
matter?Is there a right size for
businesses wishing to move into new business models?Can you be too big or too small?